California Independent System Operator Corporation
Memorandum
To:
ISO Board of Governors
From: Ryan Seghesio, Chief Financial Officer & Treasurer
Date: July 5, 2012
Re:
Decision on 2012 Capital Project Budget Amendment
This memorandum requires Board action.
EXECUTIVE SUMMARY
As part of the annual budget process, in addition to the operations and maintenance
budget, the Board approves a targeted level of capital expenditures that the ISO will
spend in the budget year. The 2012 capital expenditure budget was approved at a level
of $20.8 million. Management recommends an increase of $3.6 million due to the
unplanned projects described in this memo. As further explained, this amendment will
have no impact on current grid management charge rates. Management recommends
the Board approve the following motion:
Moved, that the ISO Board of Governors authorizes an increase to the 2012
capital project budget of $3.6 million for a total 2012 capital project budget of
$24.4 million, as described in the memorandum dated July 5, 2012.
DISCUSSION AND ANALYSIS
During the 2012 budget process, the Board approved a targeted level of capital
expenditures during the year of $20.8 million. Approximately $35 million of proposed
projects were scrutinized and ranked to develop the initial list of projects that would
make up the $20.8 million. These projects are further reviewed and prioritized by
Management throughout the year and ultimately approved by the Corporate
Management Committee. Additionally, unplanned projects that must be completed,
such as projects required to comply with FERC orders, compete for these resources.
GC/FINANCE/R. Seghesio
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Vendor contract
In June, during a Board meeting in executive session, the Board authorized
Management to finalize negotiations on a vendor contract. The final cost of the capital
project portion of the contract is approximately $2.6 million. Because the ISO does not
wish to delay or eliminate the projects that are being funded by the original capital
budget amount of $20.8 million for 2012, Management requests that the Board increase
the capital budget to accommodate this additional project.
FERC Settlement – Constellation Energy
In March, FERC issued an order approving a stipulation and consent agreement
between the Office of Enforcement and Constellation Energy Commodities Group
(Docket No. IN12-7-000). In the order, FERC required Constellation Energy
Commodities Group to pay $1,000,000 to each of the RTOs and ISOs for the purpose of
acquiring computer hardware and software that improves their respective surveillance
and analytic capabilities. Management is still working with FERC’s Director of the Office
of Enforcement regarding the specific use of these funds, and the Board will be updated
at a future meeting on that decision.
While the funding source for these capital expenditures is known, the targeted level of
the capital project budget will need to be increased by $1 million so the ISO has
authorization to proceed with using its capital budget to improve market monitoring
surveillance and analytic capabilities..
NO IMPACT TO GRID MANAGEMENT CHARGE
Increasing the targeted level of capital expenditures in 2012 has no impact on the
current grid management charge rates being paid by market participants. The ISO
collects funds to be used for capital expenditures either through the issuance of bonds
or through the cash-funded component of the annual revenue requirement. The Board
approves a targeted level of actual capital expenditures during the budget process
which may or may not be at the same level as the capital being collected in the current
year. This results in a varying amount of capital reserves that are available for
situations like those outlined in this memo. For example, in 2011, the Board approved
capital expenditures at a targeted level of $23.5 million; however, Management capped
actual expenditures at $19.6 million, resulting in the addition of approximately $4 million
in capital reserves. Over the long-term, the ISO intends to manage its capital reserves
account to allow for anticipated capital expenses to be funded without the need for new
bond issuances or major fluctuations in the revenue requirement. This allows more
predictability for those paying rates and for cost savings to the extent the ISO can avoid
a new bond sale.
The FERC settlement has no impact on the capital reserves as the $1 million was
received from a third-party for this specific use.
GC/FINANCE/R. Seghesio
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CONCLUSION
Management recommends that the Board increase the 2012 targeted capital project
budget to $24.4 million, an increase of $3.6 million from its current approved amount of
$20.8 million.
GC/FINANCE/R. Seghesio
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